SMEs warned to balance corporate health with compliance costs

Moves by the Federal Government to reduce financial reporting and audit requirements for businesses have been welcomed by accountancy and audit experts, but businesses have been warned the costs associated with poor corporate governance may outweigh any reduction in compliance costs.

And SMEs have been urged to consider their options in continuing to get an assessment of their governance and strategic position, if not from audits then from other forms of independent assurance.

The Federal Government has announced it will reduce the reporting burden for small and medium businesses by raising the current financial reporting thresholds.

Currently, proprietary companies are considered to be ‘large’, for the purposes of ASIC reporting requirements, if they meet two of three thresholds for a given financial year:

$25 million or more in consolidated revenue;

$12.5 million or more in consolidated gross assets; or

50 or more employees.

The government now says it will effectively double all three of the requirements, which will allow around 2,200 firms to be excused from their current ASIC financial reporting and audit requirements.

The new thresholds mean firms will be considered ‘large’ if they meet two of the following three requirements:

$50 million or more in consolidated revenue;

$25 million or more in consolidated gross assets; or

100 or more employees.

But while the move will cut compliance costs — estimated by the government at $81.3 million annually or an average cost of $36,950 per company — there may still be audits required for many businesses.

Companies that fall between the former and new thresholds will still be required to keep written financial records and may be required to prepare or audit financial reports if directed by ASIC, or by five per cent or more of their shareholders. Those with borrowing facilities or looking to sell or exit as part of business succession planning may also be required to continue being audited – but will be spared the requirement to lodge.

Pitcher Partners Melbourne partner Nick Bull said the reduction in regulatory burden was welcomed but businesses should not abandon the importance of careful oversight, good governance and strategic consideration of a company’s position.

“We support the government changes to reduce regulatory burden of running a business but there seems to be an inference that audits are a cost without any real benefit,” Mr Bull said.

“If there is a company that genuinely is relieved by this announcement, I would really query the quality of the audit they are currently receiving.

“The need for audit originated from the first separation of business ownership and their management in the 16th century - and in an increasingly complex and changing world there is still a place for it because owners can’t be everywhere, and they have to trust managers to help them run their business.”

Mr Bull said auditors played a ‘check and balance’ role between owners and managers to ensure there is an alignment of interests and many an audit was responsible for detecting issues that could be highly detrimental if left unaddressed.

In the absence of a year-end audit, businesses should look at their options to have other forms of strategic insight into their business performance and activity.

“The assumption from an owner or a stakeholder in a business that suddenly, because it sits between $25 million and $50 million in turnover, that it no longer has to have an audit, that owners know exactly what is going on, that everybody is getting paid properly, that all the critical processes are being done properly, that risk is being vigilantly managed, that they can rely on the information they are being given to make important decisions – I think that is wishful thinking. Without an audit – how do they know?,” he said.

Mr Bull said different audits from different auditors would provide different services and assurances, but that providing a framework for dealing with possible conflicts of interest between owners of a business and employees and other stakeholders, was vital.

“From an independent viewpoint with no conflicts, we look at the functional alignment between the interests of the business owners and the activities of management,” Mr Bull explained.

A Harvard Business School study in 2013 showed conclusively that audited firms performed better than those unaudited over the short and longer term.

“Especially in the SME space being targeted by the Treasurer, we are not suggesting having the same audit process that BHP or the banks are subject to, but there are elements of audit that we do for our clients in that space that are incredibly valuable in enhancing decision-making and implementing better practice that enable them to out-perform their peers who are unaudited,” Mr Bull said.

“Not only do you want somebody watching over your business, but you need someone who can help you to make it the best business it can be.

“People should really be asking themselves what the cost is of not being audited.

“Is there something they are missing out on because even if they are not compelled to have an audit, they would benefit from talking to someone with that skill set and insight they wouldn’t otherwise be getting.”

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